Introduction: The agricultural sector is crucial for the developing countries heavily reliant on oil exports. It ensures food security, creates jobs, boosts non-oil exports, and reduces rural migration. In developing nations, a significant percentage of the population relies directly or indirectly on agriculture for their livelihood. The significance of oil in the macro economy has declined over the past thirty years, but oil prices still substantially influence the economy. A number of studies have shown that changes in oil prices affect the agricultural sector, but there are limited studies on the specific impacts of these shocks. The susceptibility of the agricultural sector to oil price shocks, encompassing both demand shocks associated with non-OPEC oil and supply shocks stemming from OPEC oil, has been the focus of considerable scrutiny. Investigating and quantifying these shocks and their impact on agriculture is undoubtedly crucial. The oil price shocks have a substantial impact on economic activity, especially in open economies. These effects stem from the timing of economic agents’ decisions and can explain a significant portion of business cycle fluctuations. Oil-exporting emerging economies, in particular, face distinct challenges from the oil price shocks, including the Dutch disease. The impacts of oil price shocks on these economies are contingent on their underlying causes and the economic conditions. This study aimed to examine the impact of oil revenue shocks on Iran’s economy, particularly focusing on the agricultural sector, using a Dynamic Stochastic General Equilibrium (DSGE) model.
Materials and Method: Dynamic Stochastic General Equilibrium (DSGE) modeling represents a macroeconomic methodology commonly employed by monetary and fiscal authorities for policy analysis, historical time-series data interpretation, and future forecasting purposes. The DSGE econometric modeling leverages general equilibrium theory and microeconomic principles in a manageable fashion to postulate economic phenomena, including economic growth, business cycles, policy effects, and market shocks. The DSGE is a type of economic models that can calculate the trajectory of fundamental economic variables while taking into account external shocks and initial conditions. The model framework in this study represented a real business cycle model rooted in microeconomics principles. It considered essential conditions such as competitive markets and a frictionless economy. The study segregated production, investment, capital stock, and employment variables into public and private sectors to observe the impact of oil price shocks and government consumption expenditures on both sectors. In the context of Iran’s oil-based economy, it has traditionally been assumed that the government would derive its revenue primarily from oil sources. Based on this income, the government engages the labor force from households and allocates a portion of its earnings to government-led production. As such, the overarching economic model encompasses the interactions between the firm, household, and government sectors.
Results and Discussion: The study results indicated that the oil price impact led to a 0.05 percent increase in agricultural sector production in the first year, followed by a sudden significant decrease of -0.05 percent. The average effect of oil prices on the agricultural sector's production was generally estimated negative, due to the presence of Dutch disease in Iran’s economy. The oil price shock had a positive impact on investment in the agricultural sector initially, increasing investment by 0.28 percent in the first year. However, this effect diminished rapidly, with investment changes turning negative soon after and approaching a stable trend below the zero line. The agricultural sector experienced an initial increase in employment due to the oil price shock, but this trend eventually declined. Throughout all years, the impact of the oil price impulse on the agricultural sector employment remained positive, with the variable tending towards a long-term trend above zero. The study results also indicated a 0.01 percent increase in the agricultural sector inflation in the first year due to the oil price impact; subsequently, the inflation rate showed a downward trend, becoming negative starting from the seventh period, and later experiencing an upward trend following changes in the general price index for the agricultural sector.
Conclusion and Suggestions: Every economy, regardless of its development status and size, is vulnerable to the negative impact of uncertainties and economic shocks, which can lead to significant harm. Economic shocks introduce increased risk and decision-making complexities due to the disruption and volatility they create in economic variables. The interplay of economic variables facilitates the transmission and amplification of shock effects across the entire economy, leading to economic instability. This instability results in various costs, including suboptimal resource allocation and reduced production, investment and employment, as well as price fluctuations. Understanding the propagation of shocks and analyzing their impact on economic variables enables policymakers and economic stakeholders to make informed decisions to mitigate adverse effects. This knowledge also empowers investors and economic producers to make proactive and informed decisions, anticipating potential consequences.